Capital Market Assumptions provide 10-year expectations for the most widely held equity, fixed income and non-traditional asset classes, measuring both return and risk. A summary of our key assumptions is provided below.
Global Economic Outlook: We expect real economic growth in the developed economies to continue to moderate over the next decade. This is due to limited growth of the developed labor force and to an assumption of no significant offset from improved productivity growth. We expect real economic growth and inflation in emerging markets to advance at higher annualized rates.
Equities: Our 10-year annualized nominal forecast return for global equities is 5.9%. Our long-term return forecast for US equities is somewhat lower, at 4.9%. Developed market equities outside the US are forecast at 7.8%, a differential largely accounted for by their lower historical valuation ratios. Our long-run forecast for emerging market equities is 6.7%.
Fixed Income: Our long-run forecast for unhedged global aggregate bonds is 1.2%. Our long-run forecast for US aggregate bonds is 2.5%, consistent with higher initial yields in the US. In US credit markets, we are forecasting modest upward adjustment in average spread levels over the next 10 years, contributing to expected returns of 2.6% and 4.3% for US investment grade and high yield bonds, respectively.
Real Assets: Broadly defined to include asset classes that have physical properties or returns that are highly correlated with inflation, real assets include commodities, REITs and TIPS as real assets. Our 10-year expectation is that returns for each of these asset classes will exceed the forecast rate of US inflation.
Currency and Currency Hedging Returns: Over the next 10 years, we are forecasting a modest decline of the US dollar relative to developed market peers, with annualized gains ranging from 0.2% for the Canadian dollar to 1.1% for the Japanese yen. Emerging market currencies, in contrast, are expected to depreciate against the US dollar over the next 10 years.
60/40 Portfolio Return: Based on our long-term forecasts, a balanced portfolio of 60% Global Equities unhedged and 40% Global Aggregate Bonds hedged is forecast to return 4.2% annually over the next 10 years.